Charleston Trend Forecast 2009

8/9/2019 Charleston Trend Forecast 2009

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Charleston Trends and Forecast

Charleston Market Report

www.charlestonmarketreport.com

2009

Welcome to my presentation. I was unable to make this entire presentation on April14th at the Friends of the Carter Center networking event at the College ofCharleston due to time constraints. So I will do my best to talk you through eachslide and help you understand what I trends I am seeing in the Charleston and U.S.economy.


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Opening Joke

I actually told this joke before I started thepresentation.

www.charlestonmarketreport.com2009

Young Chuck, moved to Texas and bought a donkey from a farmer for $100.

The farmer agreed to deliver the donkey the next day. The next day he drove upand said, "Sorry son, but I have some bad news. The donkey died."

Chuck replied, "Well, then just give me my money back."

The farmer said, "Can't do that. I went and spent it already."

Chuck said, "Ok, then, just bring me the dead donkey."

The farmer asked, "What ya gonna do with him?"

Chuck said, "I'm going to raffle him off."

The farmer said, "You can't raffle off a dead donkey!"

Chuck said, "Sure I can. Watch me. I just won't tell anybody he's dead."

A month later, the farmer met up with Chuck and asked, "What happened with thatdead donkey?"

Chuck said, "I raffled him off. I sold 500 tickets at two dollars a piece and made aprofit of $898.00."

The farmer said, "Didn't anyone complain?

Chuck said, "Just the guy who won. So I gave him his two dollars back."

Chuck now works for Goldman Sachs in their OTC Default Derivative Department.

Ironically, the Goldman Gangstas just declared a $1.5 billion profit this week afterreceiving TARP money just a few months ago. Amazing!


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Definitions

SFD = Single Family Detached (House) SFA = Single Family Attached

(Condo/Townhouse)

Months Inventory = "Current Inventory" divided by"Monthly Sales. This reflects how many months itwould take to sell out of inventory at the currentmonth's rate of sale.

Big Mama = The Government

Go Go Days = 2004-06


2009

I am sure many of you already know these definitions but I included them just incase you dont.


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The Economy and Real Estate


2009

The economy, real estate and stock market are all complicated just like my girlDenise Richards. There are thousand of variables that effect each industryeveryday and the media and internet can spit out info at a lightening fast pace thatis enough to confuse anybody. All this information overload makes it difficult to stayfocused on the real fundamentals that matter to each segment of the economy.

This is why the CMR has a disciplined and focused approach to evaluating andmeasuring the risk in the market.


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Paradigm Shift in Finance


2009

Everything happens for a reason!

Credit is the engine for real estate since most transactions are leveraged.

We just had a major transmission failure of the the U.S. credit engine that takestime to repair. This engine will never run in the same manner it did from 2004-07 sowe will have to deal with the ramifications of the shift in financing.

This shift was force consumers to save more and live within their means in thefuture.


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Paradigm Shift in Finance

U.S. consumer spending was out of control.

U.S. consumer living beyond means.

U.S. consumer is addicted to credit.

Wall Street profited from providing the fix.

Enormous opportunities if have cash!

Opportunities difficult because of creditcontraction and tighter lending.

Back to fundamentals.


2009

I believe there are major opportunities in this market but they will be more difficult toachieve because credit is now very tight. We have a consumer who has beenaddicted to credit for many years and Big Mama and Wall Street acted like drugdealers straight out of Columbia. Due to this major contraction of credit there aremany real estate players who are boxed in with projects and have run out of cash.

Those with access to cash and credit will be able to pick up distressed andperforming assets at discounted prices. There are also many real estate deals thatare worthless and have no bids that will cause major problems for the banks thatmade the loans.

In order to stay ahead of the pack investors will need to be very careful atmeasuring risk, stay disciplined and stick to the fundamentals.


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Risk Management

The trend is your friend.

The entire finance and real estate industry lostfocus of risk management.

Banks, Appraisers, Federal Reserve, Realtors,Big Mama, Credit Rating Agencies, Builders,Developers.

This is now Water under the bridge.

No point in dwelling on the past and playing theblame game.


2009

After spending 10 years in the stock and real estate market I can not tell you howimportant it is to keep the trend as your friend. Those who fight the trend usuallylose.

Since 2000 when Lending Gone Wild got started up the entire financial industrylost focus of risk management and it is now biting us (the taxpayer) in the rear.Once Lending Gone Wild was shut down there has been plenty of blame to goaround on who was at fault. There were many parties involved and knew what wasgoing and others unknowingly were just busy making money. Regardless, it is nowwater under the bridge and in the past and we all must focus on the present andfuture.

At the end of the day our clients want just one thingTHE TRUTH. So why notgive it to them? Quit dwelling on how bad the media coverage is on the economy

and communicate the truth with your clients. This is the entire purpose of the CMR.Take the noise out of the daily information overload and help piece together what isa very complicated economic puzzle so our clients can make better investmentdecisions.


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U.S. Housing Price Trend.Boring!


2009

As you can see from the chart above is that U.S. housing prices were consistentlyboring from 1950 until 2000. They averaged approximately 1.5-2% and stayedreally close to the trend line.

Then something amazing happened. Wall Street needed a new gig to generatebillions of dollars in fees and Congress repealed the Glass-Stegall Act of 1933. Theinternet industry had blown up and we were heading for a recession so what wasgoing to be Wall Streets next big idea.


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Price Explosion.Booyah!


2009

Thus the Perfect Storm was created. Viva La Lending!

You can see the incredible spike in home prices that had not been seen in over 50years.


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Current Bailout Tab

$7,244,000,000,000

$7.244 TRILLIONSince December 12, 2007

Source: Congressional Budget Office, Federal Reserve, U.S. Dept. of Treasury


2009

The current tab includes:

Swaps, TAF, Stimupork, TALF, Bear Stearns bailout, Fannie and Freddie bailout,AIG bailout, Money market fund bailout, TARP, Citigroup bailout, Bank of Americabailout, Foreclosure Relief, Purchase of Treasuries, and Toxic Asset Plan.

More to come? Bet your future taxes on it.


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Stages of Real Estate

Cycles


2009

Stage 1

Sta

ge

2

Stage 3

Stage4

We are here.

Currently the Charleston real estate market is in the worst stage which is stage 4.Real estate is no different than the stock market or the weather because it runs incycles. Each of these stages may run longer than the other but at the end of theday prices do not go up forever as so many believed during the Go Go days.

The stages of real estate are explained below:

Stage 1 Market hits bottom.

Stage 2 Uptrend. The Go Go days from 2001-2007.

Stage 3 The market hits a peak.2006

Stage 4 The downturn. 2007 Until ?


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Fundamental Analysis vs.Technical Analysis

1. What to Buy2. Segmentation of

demographics andeconomic data.

3. Price/Rent Ratio4. Sales comparison,

cost and incomeapproach.

1. When to Buy2. Trend Analysis3. Moving Average4. Market Momentum5. When to Sell

What is Fundamental Analysis? What is Technical Analysis?

Basically, there are two types of securities analysis fundamental analysis andtechnical analysis. Fundamental analysis is what most of us are familiar with.When you see an analyst on television or read comments from an analyst in amagazine or news story, most often these comments come from fundamentalanalysts.

A fundamental analyst tries to answer the question What to buy. They will studythe companys balance sheet, evaluate the management team, try to understandthe quality of the companys earnings.

A technical analyst tries to answer the question When to buy and just asimportantly, When to sell. A technical analyst wants to find the trend of a chart is it trending up or trending down. Is the stock outperforming the broad market?How high, or in some cases, how low can the stock go?

Unfortunately, there are very few on Wall Street who effectively combine thefundamentals with the technicals. In a sense, theyre playing the piano with onlyone hand. While that may be a way to play a simple melody, you can play muchbetter music if you play the piano with both hands. In fact, our game plan isgrounded in this philosophy of combining the fundamentals with the technicals, orplaying the piano with both hands.


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Supply and Demand

We all understand thebasic forces of supply anddemand.

The same forces thataffect prices in thesupermarket also affectprices in the stock andreal estate market.

Stocks, sectors, and assetclasses move in and out

of favor just like producein the supermarket.

We all understand the basic law of supply and demand; we have all experiencedthese forces at the supermarket. We inherently understand why there are lemonadestands in the summer and hot chocolate stands in the winter. Stocks and realestate move in and out of favor just like produce in the supermarket.

In economics and real estate the first thing they teach you is that supply anddemand dictates action on price. However most economists or real estate analystsdo not even utilize the proper analysis of supply and demand.

Why? The reason is that it is not taught.


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5 Main Indicators

1. Existing Home Sales

2. Inventory

3. Building Permits

4. Interest Rates

5. Foreclosures

All 5 Indicators can have an impact on price.

Key measurements of Supply and Demand.


2009

The five main indicators that the CMR uses to analyze the market are shown above.These indicators are placed in an order of importance where the first three are themost important and the last two are lagging indicators.

All five of these indicators have an impact on price which is why we monitor them ona consistent basis. I am merely monitoring these indicators in order to spot a majorchange in trend that will notify me of major buying or selling opportunities beforeeveryone else.


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Market Momentum

Collect monthly data. Determine a Moving Average.

(Sum of months 1 through 12 divided by 12)

Calculate the Market Momentum.

(Current 12 month MA Previous Year MA)divided by Previous Year MA

MM=Speed of Trend

Trend = Change in Direction


2009

The important aspect about the market momentum formula to understand is thattrends DO NOT change in one month. You will notice that the market momentumcalculation includes current 12 month moving averages and previous year movingaverages.

The National Association of Realtors and many other real estate groups are famousfor releasing data and bragging about how sales improved X% from the previousmonth. These are very misleading statements to the public because trend changesdo not occur that quickly. It takes two years worth of data just to create a marketmomentum chart.

What the market momentum charts do is take the noise out of the data. Real estatemoves in slow motion compared to the stock market so spotting trend changes isvery predictable.


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Existing Home Sales


2009

Here is the most important indicator the CMR follows dating back to 1990. You willnotice that over the past 19 years the Market Momentum has never really venturedto far below the trend line into unfavorable status. The Charleston real estatemarket has been very consistent for a long time and prices never appreciated at asevere level like certain markets in California have experienced in the past.

This trend changed in 2005 when the market momentum began declining andswitched to unfavorable status in September of 2006. I knew we had major issuesat this point in time with the other variables in play in the market that was theequivalent of a red flag going up regarding the real estate market in Charleston.

Now that prices are beginning to decline I believe there is a strong possibility thatwe could see the bottoming of sales volume. The Feb. 2009 sales volume of 333transactions was the lowest number number of sales in the MLS since Feb. 1992.


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Inventory


2009

.


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Tri-County Income

Single - $32,111 per year

Married - $64,222 per year

15% Income Tax Rate

Single 28% DTI (After Taxes) - $637

Married 28% DTI (After Taxes) - $1274

Most buyers qualify for homes ranging from$100,000-$180,000

2926 out of 10,083 homes..29% of inventory!

Inventory in Charleston County out of whack.


2009

I took this data from the Bureau of Labor Statistics. What I did is factor a 15%income tax rate into these average Charleston salaries and then estimate what anlending underwriter would determine these qualified buyers Debt to Income (DTI)would be per month.

The conclusion is that most homebuyers in the Tri-County area can really onlyafford a home priced between $100,000-180,000. Taking this stat into account wecan see how completely out of whack our inventory is when only 29% of the 10,083SFD and SFA homes listed for sale in the MLS fall into this price range.


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Tri-County (Detached & Attached)Supply and Demand Trends


2009

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Demand

Sa

lesperMonth(MLS)

0

2000

4000

6000

8000

10000

12000

Supply

UnitsofInventory(MLS)

Monthly Sa le s Curre nt Inv

The chart above is a supply and demand chart of all homes in the Tri-County area.What you will see is the inverse relationship that sales versus inventory has in themarket. This is why these are two of my most important main indicators.

You will notice how high demand (blue bars) was from 2004-06 which kept inventoryat lower levels. Then the trend began to slowly change and an opposite effect onthese two variables began to take place. If you were not monitoring thousands oftransactions you could not have seen this coming.

The March 2009 sales volume was lowest number hit since 1999 according to theMLS. There has been a major deterioration of demand in this chart which explainsthe build up of inventory in our market.

As the price decline stage takes effect and homes become more affordable demandwill increase and supply will decrease. Unfortunately this transition takes time in thereal estate market compared to the stock market.


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Counted Inventory New HomesBerkeley County


2009

I would like to thank William and Mary Lattimore of Coastal MarketGraphics forgiving me the next three charts on the new homes market in Charleston. This is avery busy chart so let me help point out what is most important in these charts. Inthe top right corner of the slide you will notice how the total supply column of NonFinished Unoccupied (NFU) homes has been decreasing from 12 months back untilthe present time. This is good news since our market is currently overbuilt. Thereis no need for developers to add more inventory into a saturated market when wehave over 10,000 homes for sale. This slide represents a great picture of themarket correcting itself due to existing conditions. Another important piece of data

on this slide to focus on is in the bottom right corner. At the present time, theBerkeley County # of Months Supply stands at 4.6 months, which is roughly twotimes higher than the ideal supply figure of 2 to 2.4 months supply.

In my opinion, this is very encouraging news for Berkeley County that I will discussin more detail later.


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Counted Inventory New HomesCharleston County


2009

Charleston County has the most disturbing new homes inventory situation out of thethree counties in the low-country. Charleston county still has 1391 NFU homessitting on the market for sale, which is approximately 3 times higher than the idealsupply according to MarketGraphics.

The other problem with this new home inventory in Charleston county is that it isgenerally priced higher than Berkeley and Dorchester counties because Charlestoncounty includes areas such as Mount Pleasant, Isle of Palms, Folly Beach,Sullivans Island, and Dunes West.

The new home inventory in Charleston county will feel the most pain because of thepricing aspect and lack of demand.


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Counted Inventory New HomesDorchester County


2009

Dorchester, which is smaller than Berkeley county, looks very similar to Berkeleycounty in terms of supply. Again, this is good news and as demand picks up sincewe are now in the spring and summer season of real estate I expect the new homeinventory picture to improve.


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Tri-County SFD Snapshot


2009

17.4$ 249$ 639,900Daniel Island

16.3$ 158$ 384,000Mt. Pleasant

21.7$ 150$ 235,000James Island

24.5$ 127$ 185,250Johns Island

13.4$ 124$ 215,000West Ashley

9.5$ 91$ 165,500Goose Creek

15.0$ 88$ 170,000Summerville

12.3$ 81$ 149,990North Charleston

14.8$ 86$ 165,000Dorchester

19.3$ 152$ 236,500Charleston

12.7$ 103$ 172,500Berkeley

16.5$ 124$ 197,000Tri-County

MIPSFMedian Sold

I highlighted in green the areas that are affordable according to my Tri-Countyincome slide where I mentioned most people can only afford a $100,000-180,000home.

You will notice a consistent theme where Berkeley and Dorchester counties aremuch more affordable than Charleston county for obvious reasons.

An important part of this slide to watch is the Months Inventory (MI) on the right. Iexpect these numbers will decline because we are now in the buying season for realestate. Unfortunately, due to the severe recession the Tri-County inventory hasbeen building for the last few years and is at extremely high levels in many areas.These high level areas will experience larger price declines in the future.


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Tri-County SFD$100,000-$200,000 Price Range


2009

Supply & Demand

$100,000-$200,000 Price Range

$80

$85

$90

$95

$100

$105

$110

$115

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

$perSq.Ft(MLS)

0

2

4

6

8

10

12

14

16

MonthsofInventory(MLS)

Months Inventory Avg $/Sqft Poly. (Avg $/Sqft )

f

$8000 1st timehomebuyer tax credit!

This is a chart of the sweet spot of the SFD Tri-County market based on simplecalculation of income. What you will notice is months inventory on the right side isstanding at approximately 11 months right now. I fully expect this to decrease sincewe are now into the spring and summer seasonal period along with low interestrates and the $8k homebuyer tax credit.

Yes, it is an excellent time to buy an affordable home in Charleston if you have a

secure job with decent income and a down payment.

You will also notice that the Price per Square.Foot on the left side of the chartpeaked in 2007 and has declined approximately 14% since that time. This is amajor decline for the low end of the market! However, we are seeing a slightadjustment to the upside in this segment of the market due to low rates and the taxcredit.


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Tri-County SFDSupply & Demand by Price Range

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Percentage

$0-100k

$100-199k

$200-299k

$300-399k

$400-499k

$500-599k

$600-699k

$700-799k

$800-899k

$900-999k

$1mil+

SFD Price Range

Source: MLS

Current Inventory % YTD Sales %


2009

This slide represents a basic supply and demand chart by price range for the Tri-County SFD market. When you see the maroon bar (YTD Sales) exceed the bluebar (Current Inventory) that is a good sign because demand is higher than supply.Again you are seeing the lower end of the market ($0-400k) gradually being workedoff. The real action is in the $100-300K market because it is affordable.

This is not rocket science everyone. The consumer is back to basics and most inthe Tri-County can not afford anything less than $400k. Even the individuals andcouples who can afford a more expensive home are moving down in price becauseeveryone has lost so much money in real estate and the stock market over the past

few years. We have now entered the frugal economy and the inventory sitting inupper end of the price range is at the highest risk of more severe price declines inthe future.


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Tri-County SFD Inventory Snapshot


2009

0

500

1000

1500

2000

2500

$0-100k

$100-199k

$200-299k

$300-399k

$400-499k

$500-599k

$600-699k

$700-799k

$800-899k

$900-999k

$1mil+

Price RangeSource:MLS

Inventory(#ofHomes)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

MonthsofInv

entory

Inventory Months Inventory

We would prefer to have months inventory below 6 months but this is not a normalreal estate market. It is obvious from this SFD inventory snapshot that the lowerinventory levels are at the lower end of the price range, where real estate isaffordable for most buyers. This is not a coincidence.


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Mount Pleasant SFD Market Shareof Tri-County by Price Range


2009

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Perce

ntage

0-$100k

$100-199k

$200-299k

$300-399k

$400-499k

$500-599k

$600-699k

$700-799k

$800-899k

$900-999k

$1mil+

Price Range

Source:MLS

Percentage

A scary chart for the Mount Pleasant crowd. Notice the percentage of inventory inthe unaffordable range of the market for each price range in the Tri-County.

Once these more expensive homes sell that are sitting on the market you will seemajor price declines show up in our indexes.


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Tri-County SFA Snapshot


2009

43.2$ 148$ 161,150James Island

21.5$ 130$ 193,500Mt. Pleasant

14.4$ 107$ 181,850West Ashley

10.6$ 88$ 120,000Goose Creek

20.4$ 84$ 123,000Summerville

20.4$ 84$ 123,000Dorchester

32.3$ 175$ 187,380Charleston

22.3$ 113$ 124,900Berkeley

29.2$ 154$ 172,250Tri-County

MIPSFMedian Sold

You have to be careful with SFA property. The median sold and PSF do not includethe regime fees. You must factor the monthly regime fees into the equation to get atrue sense of the cost to own a townhouse or condo. This snapshot tells the samestory as the SFD snapshot.


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Tri-County SFASupply & Demand by Price Range

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Perce

ntage

$0-100k

$100-199k

$200-299k

$300-399k

$400-499k

$500-599k

$600-699k

$700-799k

$800-899k

$900-999k

$1mil+

SFA Price Range

Source: MLS

Current Inventory % YTD Sales %


2009

Same story as the SFD snapshot.

The demand is where the maroon bar (YTD Sales %) is higher than the blue bar(Current Inventory). The demand for SFA is in the $0-199k.


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Tri-County SFA Inventory Snapshot


2009

0

200

400

600

800

1000

1200

$0-100k

$100-199k

$200-299k

$300-399k

$400-499k

$500-599k

$600-699k

$700-799k

$800-899k

$900-999k

$1mil+

Price Range

Inventory(#ofH

omes)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

MonthsofInventory

Inventory Months Inventory

This chart demonstrates the high quantity of homes on the market (Red bar) vs. theMonths Inventory (Blue Line).


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New Building Permits


2009

Jan.2005

The new building chart is in un-chartered territory based on historical data.Although this chart hit -38, which is an all time low record the fact that new buildingpermits has slowed down considerably is a good thing when you have a market thatis overbuilt.

What is really fascinating about this chart is how the momentum began to decline in

January 2005. This sign of weakness was well in front of the time when real estatehit its peak in 2007.

I believe we should start to see this chart bottom out soon since credit is so tightand there is a ton of inventory sitting on the market right now.


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Tri-County Annual Housing Construction

Tri-County Building Permits

0

2,000

4,000

6,000

8,000

10,000

12,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source:Census Bureau

No.ofPermits

Single Family Multi-Family Total Poly. (Total)


2009

.


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Interest Rates


2009

30 Yr. Conventional Mortgage Rates

4

5

6

7

8

9

10

11

12

Jan-90

Jul-90

Jan-91

Jul-91

Jan-92

Jul-92

Jan-93

Jul-93

Jan-94

Jul-94

Jan-95

Jul-95

Jan-96

Jul-96

Jan-97

Jul-97

Jan-98

Jul-98

Jan-99

Jul-99

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Date

MortgageRate%

Series1 6 per. Mov. Avg. (Series1) 12 per. Mov. Avg. (Series1)

Source: Federal Reserve

Created by: Brad Rundbaken


Here is a major bright spot in the real estate world right now thanks to the U.S.government. Yes, the government has artificially kept interest rates low by buying

up our own treasuries which has helped the residential real estate market. You willnotice how we are at low rates not seen in a long time.


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Treasury Yield Story


This chart goes all the way back to 1962 and demonstrates the various interest ratestages we have been in over the years.

Currently we are in a deflationary stage for real estate. This is evident in the actionon home prices.

I expect us to return to an inflationary period sometime in the future. Let us all hope

it is not hyperinflation. I expect inflation to return and it will present difficulties forthe real estate market as this will place major pressure on home prices to comedown further.


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Foreclosures


2009

Tri-County Distressed Real Estate

Source: RealtyTrac

185205

107

177 167140

316 315

142

515

287

373

174158

129

165

251

210

675 678

378

857

705723

0

100

200

300

400

500

600

700

800

900

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09


#ofUn

its

Berkeley Charleston Dorchester Tri-County

In order to get more detail on how this info is compiled go to:

http://www.realtytrac.com/education/foreclosureTerms.html


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Where Art Thou Foreclosures?

See below.


2009

A recent Study by RealtyTrac found only 30% of foreclosures were listed for sale in the MLS in foru

states including CA.

Currently there are 634 Active distressed listings on the MLS out of 9696 listings.

13.5% of homes sold in Q1 2009 were distressed.

Only 6.5% of homes listed in the MLS are distressed. (4/10/09)

Based on the RealtyTrac study and my discussions with local REO brokers the Tri-Countyregion could easily have 3000 homes in some stage of a short sale or foreclosure right now.

This is a major problem that the real estate community needs to address ASAP.

Where are all the foreclosures??

Reasons there is invisible distressed inventory:

1. System overwhelmed and takes time to process.2. Banks do not want to write down losses.

3. Banks holding back inventory so prices do not fall to fast.

4. All mortgages have not reset. (See next slide)

5. Charleston prices are only recently starting to show declines.

6. An increasing unemployment rate in Charleston, declining real estate values and mortgage resetswill continue to place pressure on many homes in the Tri-County area.

Major problem that must be addressed within the community.

Government programs will not fix the problem.

There is demand but NO transparency for these properties.

Solutions:

1.) A platform designed for the private (and where sensible) public purchase of assets - a marketstabilizing process is involved. Essentially an auction process or clearing exchange2.) A structural (infrastructure) analysis of relative value - product price analysis.

3.) Affordable housing or "market rate" housing with some assistance for governing entities


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Next Wave of Defaults.AlARMing


2009

You will notice from the graph above how we are almost done with all the sub-primeresets. However there are other types of loans such as Alt-A and Prime that aredefaulting in Charleston and other cities around the country. This vicious cycledoes not end until 2012. These defaults will continue to place pressure on homesuntil the loans are modified or resold. It will take time to work through these loansand reduce distressed transactions in the real estate market.


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Foreclosures cont.


Equifax, a well-respected credit bureau, found that 7% of homeowners withmortgages that were at least 30 days late on their payments in February, thats up50% from a year ago. And close to 40% of sub-prime borrowers are late, up from23.7% a year ago.

We really did not experience an increase in short sales and foreclosures here inCharleston until 2008. It will take us a few years to clean up the mess that wascreated mostly from 2004-07.

This will create opportunity for many buyers who have cash in a desirable locationof the U.S.


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Foreclosure Effect on Price


2009

Obviously an inverse relationship.

As foreclosures increase the median home price drops.

California has witnessed a 50% decline in the median home price over the pastthree years once foreclosures exploded from 2007 until the present time.


41/554

Negative Equity


2009

Scary chart for the Tri-County region. Yes, many people are currently underwater(house is worth less than what they owe) and this is a major concern of mine.


42/554

Charleston Unemployment


2009

Our unemployment rate has practically doubled over the past year. Although this isa lagging indicator these lost jobs will place pressure on the residential andcommercial markets in Charleston. I expect this chart to worsen for a little whilelonger. Hopefully Charleston can gain some in-migration from people up north andthe midwest who can eventually sell their homes and move here.


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Alternate Unemployment Data


2009

The U.S. government's Bureau of Labor Statistics (BLS) shocked the world Friday with the release ofits official, headline unemployment number: A surge from 8.1 percent to 8.5 percent. But it's really alot worse. This number (called "U-3"), although invariably cited by the press in the headlines, is thenarrowest, most sugarcoated measure of U.S. joblessness: It excludes workers seeking full-timejobs, failing to find them, and then accepting part-time work that almost invariably pays far less.

It excludes discouraged workers who have given up looking for jobs because they can't find any.

And, as if that wasn't enough to color the truth, the BLS has been consistently and grosslyunderstating the currentunemployment numbers, not revising them until months later when fewerpeople are paying attention.

Williams points out that:

"The pattern of impossible biases being built into the headline monthly payroll employment continuedwith March 2009 reporting. Instead of the headline jobs loss of 663,000, consistent application ofseasonal-adjustment factors would have shown a more-severe monthly jobs loss of about 750,000.This upside reporting bias has been seen in 11 of the last 12 months, with a rolling 12-month totalupside headline-number bias of 1,345,000."

The proof: In every single one of its six most recent monthly payroll reports, the BLS has announcedmassive upward revisions in prior months' job loss numbers with five of those even exceeding itsown guidelines for the acceptable margin of error (plus or minus 5 percent).

Fact #2. Government Admits Some of the Flaws

The government also publishes a broader measure of unemployment ("U-6"), which corrects some but not all of the above flaws.

This measure includes many discouraged and part-time workers, as it should. And, lo and behold,those adjustments alone add more than seven full percentage points to the unemployment rate!

Instead of 8.5 percent unemployment, suddenly we see that we have 15.6 percent unemployment,according the government's own admission.

Instead of a recession, suddenly we see that we are already in a depression.


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NATIONAL OPPORTUNITY/RISK INDEX

Source: Real Estate Economics

.


45/554

UNITED STATES

R

E

G

N

O

R

T

S

R

E

K

A

E

W

TOTAL JOBS-TO-TOTAL HOUSING INDEX

85.0

87.5

90.0

92.5

95.0

97.5

100.0

102.5

105.0

107.5

110.0

112.5

115.0

J a n

- 9 0

A

r

J u

l

O

c t

J a n

- 9 1

A p

r

J u

l

O

c t

J a

n - 9 2

A p

r

J u

l

O

c t

J a n - 9

3

A

r

J u

l

O

c t

J a n - 9

4

A

r

J u

l

O

c t

J a n

- 9 5

A

r

J u

l

O

c t

J a

n - 9

6

A

r

J u

l

O

c t

J a n - 9

7

A p

r

J u

l

O

c t

J a n - 9

8

A p

r

J u

l

O

c t

J a

n - 9

9

A

r

J u l

O

c t

J a

n - 0

0

A

r

J u

l

O

c t

J a

n - 0

1

A

r

J u

l

O

c t

J a

n - 0

2

A p

r

J u l

O

c t

J a

n - 0

3

A p

r

J u l

O

c t

J a

n - 0

4

A

r

J u l

O

c t

J a

n - 0

5

A

r

J u

l

O

c t

J a

n - 0

6

A p

r

J u l

O

c t

J a

n - 0

7

A p

r

J u l

O

c t

J a n

- 0 8

A p

r

J u

l

O

c t

J a

n - 0

9

A

r

J u

l

O

c t

J a

n - 1

0

A

r

Jobs-to-Housing Index Equilibrium

JOBS-TO-HOUSING RELATIONSHIPS

OverSupply

The total number of jobs relative to the total number of homes in the nation lendsinsight to the economic foundation that supports net housing demand. The indexedchart below presents historical relationships and a near-term forecast in jobs-to-housing relationships relative to a long-term equilibrium line derived by Real Estate

Economics:

The jobs-to-housing index is arrayed relative to an equilibrium line set at 100. Anindex above equilibrium reflects periods of pent-up demand or under supply ofhousing relative to jobs, while any index below 100 represents over supply. Asshown above, since late Year 2002, the nation has been in a state of over supply ofhousing.

This pattern of over supply suggests that the strong housing sales activity and thehousing price run-up that occurred after the 2002/2003 recession were largelyartificial, being caused by deregulation of the financial industry and the resultant

loosened lending practices that allowed non-traditional users (investors andunqualified buyers) to enter the housing market in large numbers.

Now, with unprecedented job losses, the index is being driven down further,reflecting a reduced ability for the national economy to support the existing housingsupply. The result has contributed to distressed sales, foreclosures and furtherdrops in home prices. Unfortunately, the pattern worsens during the next 12months despite the fact that very few homes are now being constructed.


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UNITED STATES

D

E

U

L

A

V

R

E

D

N

U

D

E

U

L

A

V

R

E

V

O

MORTGAGE COST-TO-HOUSEHOLD INCOME INDEX

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

Jan

-90

A

r

Ju

l

Oc

t

Jan

-9

1

Ap

r

Ju

l

Oc

t

Ja

n-

92

A

r

Ju

l

Oct

Jan-

93

A

r

Ju

l

Oct

Jan-

94

A

r

Ju

l

Oc

t

Jan

-95

Ap

r

Ju

l

Oct

Ja

n-

96

Ap

r

Ju

l

Oct

Jan-

97

A

r

Ju

l

Oct

Jan-

98

A

r

Ju

l

Oct

Ja

n-

99

A

r

Jul

Oct

Ja

n-

00

A

r

Ju

l

Oct

Ja

n-

01

Ap

r

Ju

l

Oct

Ja

n-

02

A

r

Jul

Oct

Ja

n-

03

A

r

Jul

Oct

Ja

n-

04

A

r

Jul

Oc

t

Ja

n-

05

A

r

Ju

l

Oc

t

Ja

n-

06

Ap

r

Jul

Oct

Ja

n-

07

A

r

Jul

Oc

t

Jan

-08

A

r

Ju

l

Oc

t

Ja

n-

09

A

r

Ju

l

Oc

t

Ja

n-1

0

Ap

r

Mortgage Cost-to-Income Index Equilibrium

MORTGAGE COST-TO-INCOMERELATIONSHIPS

UnderValuation

The other half of the equation to national market stability deals with housing costs(or more specifically, mortgage costs) relative to household incomes. Long termtrends and a near term forecast between mortgage costs and household incomesare shown below:

The equilibrium line shown in the chart above represents the long-term relationshipbetween costs and incomes, and as with the jobs-to-housing index, the equilibriumline associated with the mortgage cost-to-income index is set at 100. Any indexabove the 100.0 equilibrium index reflects under valuation of housing relative tohousehold income support, while an index below equilibrium represents a period ofover valuation.

The chart reveals that housing values are currently well above equilibrium, reflectinga trend of increasing under valuation that began during the latter part of Year 2007,

and is now quite severe.

This is a reversal, following four years of over valuation (a price bubble) thatformed from 2004 thru late-2007. Correcting from the past run of artificiallyovervalued housing, the current drop in home prices indicates a considerable overcorrection and unprecedented levels of housing affordability. With current andprojected job losses, under valuation may need to be even greater in order to offseta very poor jobs-to-housing index.


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NATIONAL HOUSING MARKET OPPORTUNITY/RISK INDEXFor the Month of February 2009

R

E

T

T

E

B

E

S

R

O

W

50.060.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

Jan-92

Jul

Jan-93

Jul

Jan-94

Jul

Jan-95

Jul

Jan-96

Jul

Jan-97

Jul

Jan-98

Jul

Jan-99

Jul

Jan-00

Jul

Jan-01

Jul

Jan-02

Jul

Jan-03

Jul

Jan-04

Jul

Jan-05

Jul

Jan-06

Jul

Jan-07

Jul

Jan-08

Jul

Jan-09

Jul

Jan-10

Jul

Jan-11

Jul

Jan-12

ESTIMATED DATE THE INDEX IS MANIFEST IN THE MARKET

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

Jan-90

Jul

Jan-91

Jul

Jan-92

Jul

Jan-93

Jul

Jan-94

Jul

Jan-95

Jul

Jan-96

Jul

Jan-97

Jul

Jan-98

Jul

Jan-99

Jul

Jan-00

Jul

Jan-01

Jul

Jan-02

Jul

Jan-03

Jul

Jan-04

Jul

Jan-05

Jul

Jan-06

Jul

Jan-07

Jul

Jan-08

Jul

Jan-09

Jul

Jan-10

INDEX DATE

Composite O/R Index Jobs-to-Housing Index Mortgage Cost-to-Income Index Equilibrium

COMPOSITE INDEX OF LEADING INDICATORS

The Index Leads theMarket by 18 to 24

Months It EffectivelyPredicted the

downturn.

Under Valuation willincreasingly offset

Economic Losses.Market stabilization by

3Q10.

During the 18-24 month lagtime between the index

and market manifestation,foreclosure inventory will

shrink, credit will ease and

economic growth will

resume (3Q10).

The above indexes tend to be counter-cyclical. More importantly, they tend to pre-empt actual market changes. When the above indexes for jobs-to-housing andmortgage costs-to-incomes are combined into a composite index (the HousingOpportunity/Risk Index), the resultant Housing O/R Index leads market change by18 to 24 months effectively giving a clear warning to market participants when toleave the market and when to enter. The chart below presents this composite

Housing Opportunity/Risk Index:

The O/R Index shown for February 2009 is recorded at 110.2 near a record high.This index, however, wont be felt in the housing market until the latter half of Year2010. Indeed, what were feeling now is the depressed index of early Year 2007 near the low point of the cycle.

The current index gives a clear indication as to what market conditions will be likeduring the latter half of Year 2010. And theyll be healthy - not in terms of price asmuch as in terms of sales volume. The incredibly strong values reflected by thecurrent index will become increasingly apparent as the economy begins to recover.Even with modest incremental job growth (which is expected to be evident by thelatter part of Year 2010), an increasing number of potential buyers will recognize themarkets severe under valuation, and will enter the market. Sales volume willincrease dramatically as an increasing number of buyers seek to take advantage ofunder valuation once economic stability is established. Indeed, even speculatorsmay, once again, become an issue.

Though the index has been trending in positive market territory (an over correction),the severity of the financial crisis and extremely poor market psychology willcontinue to hinder market conditions in Year 2009 and well into Year 2010.


48/554

Forecast for Charleston

Forecasting is very difficult.

Forecasting is the equivalent of fortunetelling.

Forecasting is impossible when Big Mama(Government) constantly changes the rules.

Prefer Risk Management to Forecasting!


2009

.


49/554

Tri-County Median Price Forecast


2009

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

SaleVolumeperYear

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

AverageAnnualSalesPrice

Sales Volume Avg Sale $

March 2009

$270,000Another 15-20% drop in home

rrices is possible in next 12-18

months.

Aberration in Price and Sales

This is probably one of my most busy and confusing charts but it is the one everybodywants..The Forecast.

I am forecasting another 15-20% drop in home prices for all homes above the $400k price rangeover the next 12-18 months. This would obviously have an impact on the overall median andaverage Tri-County home prices but the decline in prices would be caused by the upper end ofthe market.

The reason I anticipate a further decline in price is the Lending Gone Wild era created excess

supply and demand. You can see this by looking at the arrows on the above chart. If theCharleston market had remained on a normal trend with regards to sales volume the averagehome price would probably be approximately $225,000 and NOT $270,000. The reversion to themean will occur once the upper end of the market finally sells off at lower prices.

I do not anticipate the $100-300k segment of the market to have that bad of a correction but it isimpossible to know until we can all see all the distressed real estate in this town. Until thatoccurs we are all flying blind.


50/555

Good News About Charleston


2009

.


51/555


2009

Good News About Charleston!

.


52/555

Good News About Charleston!

Charleston is special! Travel + Leisure Magazine 2008

#1 Friendliest City

#2 Shopping

#2 Home Design

2008 Southern Living

#1 Best Southern City

Inc.Com

#6 Midsize City for Doing Business


2009

.


53/555

Good News continued

Forbes Magazine25 Strongest Housing Markets

Conde Nest

2008 #2 Top U.S. Destination

Milken Institute

2008 Top 25 Best Performing Cities

Weather, low taxes, beaches, golf, history,etc.


2009

.


54/555

Conclusions

Tri-County median home prices will continue to decline because ofupper end of market being overbuilt and overpriced due to currentsupply and demand conditions.

The affordable market is priced competitively. Deterioration of price depends on how we handle foreclosures. Charleston desperately needs affordable housing! Lending/Financial Crisis could benefit Charleston with jobs and in-

migration. Excellent opportunities in affordable market because of low rates

and tax credit. Great time to buy ifhome priced correctly! Economic and real estate correction will take time. As long as the credit system does not have any further meltdowns

we could be witnessing the low point of sales volumenow thatprices are beginning to decline.

Proper risk management is KEY.


2009

.


55/55

Thank You!

Post & Courier

College of Charleston

Everyone for Attending

PowerPoint available at:www.charlestonmarketreport.com


2009

.

Documents

Charleston Trend Forecast 2009